Cost Segregation for Data Centers: Maximize Tax Savings

Data centers represent a unique segment of commercial real estate, characterized by significant capital investments in construction and operation. These facilities house critical IT infrastructure, requiring specialized systems and equipment.

As data centers grow in popularity as an investment, driven by the increasing demand for digital infrastructure, their importance is further amplified by the rise of artificial intelligence (AI). AI applications require substantial computing power and data processing capabilities, making data centers essential for supporting this technological advancement

Cost segregation emerges as a powerful tool for data center owners, operators, and investors, enabling them to maximize tax benefits and improve cash flow. 

Understanding Cost Segregation

Cost segregation is a tax strategy that involves identifying and reclassifying personal property assets to accelerate depreciation deductions. By differentiating between real property (e.g., buildings) and personal property (e.g., equipment), owners can accelerate depreciation deductions and, therefore, reduce potential current tax liabilities. Typically, commercial real property is depreciated over 39 years, while personal property can have shorter depreciable lives, ranging from 5 to 7 years.

10 Most Common Cost Segregation Questions: Answered Read More

Data Center-Specific Considerations

Data centers have unique assets, including special-purpose HVAC systems, electrical infrastructure, specialized flooring, and security systems. In a cost segregation study, these assets are often classified as personal property, allowing for accelerated depreciation.  Additionally, the CARES Act has enhanced the benefits of Qualified Improvement Property (QIP), making it a crucial consideration in cost segregation studies related to renovations.

Benefits of Cost Segregation for Data Centers

Through a cost segregation study, accelerated depreciation can create $200,000-$400,000 in additional deductions for every $1M spent on a data center facility. By increasing deductions through accelerated depreciation rather than taking the default straight line depreciation associated with non-residential properties, taxpayers can reduce current tax liabilities and free up additional capital for reinvestment or other cash flow needs.

Examples of Cost Segregation for Data Centers

Small Data Center: Acquisition and Subsequent Renovation

• 25,000 Square Foot 2-story building
• Multiple High-Capacity Server Rooms along with 2,500 square feet of office space
• Depreciable basis: $8,478,782
• Placed-in-Service 8/2024
• Engineers moved 33.3% to 5-year personal property, 8.6% to 15-year land improvements, and 22.7% to 15-year qualified improvement property.
• First Year Tax Savings: $1,189,942

Small Data Center: Office Conversion Renovation

• 15,000 Square Foot office building converted to a full-scale data center
• Depreciable Basis: $4,638,750
• Placed-in-Service 11/2024
• Engineers moved 37.2% to 5-year personal property, and 46.7% to 15-year qualified improvement property.
• First Year Tax Savings: $1,531,680

Conclusion

As demonstrated above, performing a cost segregation study can be a powerful tool for data center owners and operators by accelerating non-cash deductions into the earlier stages of investment. These deductions will reduce current income tax liabilities and free up cash flow for further investment or business needs.

Ready to unlock significant tax savings for your data center? Contact us today to learn how a cost segregation study can accelerate depreciation deductions and boost cash flow.